Barack Obama’s banking reforms cause a stir
Leon Watson, January 26th, 2010
TRADERS are anxiously awaiting what happens next after Barack Obama announced controversial plans to put the squeeze on banks.
The US President left the financial world in a spin on Thursday last week when he revealed proposals for radical reforms. He wants to curb banks’ riskier activities by capping their size and splitting their investment and retail arms.
Commercial banks would be barred from owning, investing in or sponsoring hedge funds and private equity funds. There would also be a ban on proprietary trading – buying and selling on their own account and thus putting their capital at risk.
Why is Mr Obama threatening to take action? Well, with so much of people’s savings invested in the banks, it was thought they were just too important to be allowed to crumble when the recession hit.
They were bailed out with billions of public money and Mr Obama now wants to make sweeping changes so that the government will not have to step in again.
It was no coincidence that his announcement came on the same day that banking giant Goldman Sachs revealed it had made a bumper $13.4billion profit for the year.
But with strong indications that Europe won’t follow Mr Obama’s lead, spread betters, foreign exchange traders and CFD analysts are waiting to find out what happens next.
On Monday, UK Chancellor Alistair Darling publicly revealed his opposition to the US plans to break up the banks. He has already announced a one-off 50 per cent tax on bankers’ bonuses in the face of public pressure for a crackdown.
And City Minister Lord Myners, fresh from meeting representatives from the G7 group of leading global economies, made it clear that the UK government does not support breaking up the banks.
But if Mr Obama’s overhaul gets through Congress it is feared there could be severe repercussions around the world.
In Australia, for example, five of the top 10 banks are US owned. So does that mean they’ll be subject to US law and have to comply, even if the changes aren’t brought in Down Under? Probably not, but they may well still adopt the measures if pressure is put on them.
And the consequences of that are clear: nearly a third of trading on the ASX is generated by their hedge funds, so trading volumes could plummet if it is curbed. Locally-owned European banks such as Macquarie, UBS, Deutsche Bank, RBS and Credit Suisse would then be handed a significant advantage.
David Jones, chief marketing strategist at IG Index, told 247Bull.com: “This is another thing that just muddies the waters.
“We don’t know if this is going to be a unilateral effort by the US but we think it needs a global push.
“We saw the initial sharp sell off last week when the news broke but now the markets have started to settle.
“But that’s more because of the confusion over what it means and what will happen. One thing seems sure, though, is that for the moment it won’t do banking stocks any favours. They’ll be a drag for a while now until it becomes clear.”
Announcing the plan, Mr Obama said: “We intend to close loopholes that allowed big financial firms to trade risky financial products like credit default swaps and other derivatives without oversight.”
The banks, however, have argued that their losses in the US and Europe that contributed to the crisis were caused by bad lending – not by them taking too many risks.
Speaking on the BBC’s Daily Politics television programme, David Buik, partner for money brokers BGC Partners, said Mr Obama was taking this harsh line because the international community had failed to come up with a solution.
Mr Buik said: “I think without doubt we are in this invidious position now because since the G20 meeting in April, 10 months have elapsed and with the amount of suggestions put up by all the countries for regulatory changes, you could have filled two Encyclopedia Britannicas.
“We’ve got nothing to show for it and this is what’s caused the frustration.”
He described Mr Obama’s initiative as “ill-thought out” and “terrible” and blamed the financial crisis on “injudicious lending” in the US.
Speaking in the Sydney Morning Herald, the executive director of the Australian Financial Markets Association, Duncan Fairweather, said there was no way of telling what would happen.
“The President’s got to get his legislation through the Congress, and maybe it will in the current climate,” he said.
“We haven’t yet seen the detail of what he is proposing and we haven’t yet seen the outcome of the legislative process so it’s all a bit of crystal ball-gazing at the moment.”
Following Mr Obama’s announcement, Goldman shares dropped four per cent overnight despite the record profits. JPMorgan Chase fell 6.6 per cent and Morgan Stanley slumped by more than four per cent.
Britain’s banks were also knocked by the Obama plan: Barclays shares fell six per cent and Royal Bank of Scotland was down seven per cent.
ANZ led the decline among Australia’s big banks, falling 61c, or 2.62 per cent, to $22.65. Macquarie Group also fell – down 37c, or 3.2 per cent, to $51.60.
And on Sunday Dubai’s main index DFMGI tumbled five per cent following a global slump.
Tags: Alistair Darling, ANZ, ASX, Banks, Barack Obama, Barclays, Credit Suisse, David Buik, David Jones, Deutsche Bank, DFMGI, Duncan Fairweather, G20, G7, Goldman Sachs, IG Index, Lord Myners, Macquarie, Morgan Stanley, RBS, UBS, UK Chancellor, US President
This entry was posted on Tuesday, January 26th, 2010 at 9:57 pm and is filed under Blog, Featured.